FMCG companies: A silver lining for FMCG companies in H2 amid rising inflation

Consumer products companies expect a recovery in demand and profitability in the second half of the fiscal year due to a good monsoon, high agricultural prices, less inflationary pressures in the coming months and the “low base” effect, even though they are faced with a slowdown in demand in the current quarter. Electronics makers, however, said there were no signs of an ebb in inflation in their segment and demand for entry-level products would remain under pressure in the coming quarters.

“Given the forecast for a normal monsoon this year, coupled with a good harvest and farmers getting better prices for their crop, I hope for a quicker rural recovery. Although there is immediate pressure, we expect rural demand to recover by the end of June this year,” said Mohit Malhotra, Managing Director of Dabur India.

During earnings performance in the January-March quarter, most companies blamed the rural market slowdown for dampening overall growth. However, expectations of a normal monsoon and high food prices improved rural income prospects during the rabi and kharif season for FY23. up 4.2% in the second half of last fiscal year after a 0.5% decline at the start of fiscal year 22.

The volume, or unit sales, of consumer staples purchased by consumers fell 4.1% year-on-year in the March quarter.

Decline steeper in rural areas

During the quarter, buyers cut household spending due to inflation and the Omicron wave weighed on sales, industry officials said, citing Nielsen data. This is the second consecutive quarterly decline in the fast moving consumer goods (FMCG) market after a volume decline of 2.6% in the December quarter. The decline was more pronounced in rural areas which saw volume growth contract by 5.3% in the March quarter, while urban markets fell by 3.2%.

Managing Director Saugata Gupta said FMCG market growth was a near-term challenge due to high inflation and a high base, but demand and volume growth should improve towards the end of the quarter. of September. “This would be driven by the significant measures taken by the government to control inflation and the lower base of the previous year. Even rural demand is expected to improve over the next four to five months with projections of a monsoon normal and stable inflation,” Gupta said. .

The government has taken a series of measures to ease inflationary pressures, including reducing the central excise duty on fuel, subsidizing gas cylinders and increasing the subsidy on fertilizers. “These interventions are likely to reduce inflation directly by 25 basis points, while the indirect benefits may be an additional 25 basis points. We expect inflation to average 6-6.3% in FY23 “, said a recent report from Antique Broking. The lifting of Indonesia’s palm oil export ban from Monday will also help margins, which could slow the price hikes companies have been making for several months.

Vice President Mohan Goenka said while overall demand for FMCG was subdued, the summer product portfolio recorded double-digit growth for the first time in three years. “Inflation is impacting the recovery, but we expect a recovery in the next two quarters. The government has already taken steps to control inflation and markets are wide open. If more stimulus is given by the government and there is a normal monsoon, the recovery could be even earlier, including rural markets,” he said.

The companies, however, said much of their growth could still be driven by price increases and not increased unit sales, especially in discretionary categories. “Consumers are affected by inflation in almost everything they buy and consume. This will lead to conservation in the form of controlled consumption or lower prices over the next two quarters. The impact on basic necessities will be marginal, other purchases could be postponed,” he added. said Varun Berry, chief executive of

. said it expects double-digit revenue growth with low-single-digit volume growth. “The outcome is hard to predict, but if the cost moderates to 6,000 Malaysian ringgits for palm oil, about 7-8% less than today and $100 for crude, we should see a some margin expansion, especially in the second half of the year,” Sudhir Sitapati, chief executive of Godrej Consumer Products, said on his earnings call to investors.

Consumer electronics

The consumer electronics industry had expected a recovery in mass segment products and a recovery in rural markets in the second half of this fiscal year, but price increases in raw materials and therefore finished goods will delay recovery, industry executives said. About 50-55% of the input cost is imported. The industry therefore expects prices to continue to rise by 5-6% each quarter. Prices are up 10-12%, including the latest increase this month.

“Entry-level consumers are holding back on discretionary purchases and buying electronics only when necessary. Thus, the boom in purchases of air conditioners and refrigerators due to the heat wave may subside in due to product price increases and the overall inflationary environment,” said Kamal Nandi, Chief Business Officer of Godrej Appliances.

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